Posts Tagged pauliana
In C-493/18 UB v VA, proceedings took place between UB, on the one hand, and VA, Tiger SCI, WZ, as UB’s trustee in bankruptcy, and Banque patrimoine et immobilier SA, on the other, concerning the sale of immovable property originally owned by UB and mortgages granted over that property by UB and the action taken by WZ to have those transactions declared ineffective as against the bankruptcy estate.
A little bit of factual background may be useful – for that reference is best made to the judgment. Essentially, an avoidance (insolvency pauliana) action was launched given suspicious transactions between UB and his sister. On 10 May 2011, UB was, on his own petition, declared bankrupt by Croydon County Court. On 1 July 2011, WZ was appointed UB’s trustee in bankruptcy, with effect from 6 July 2011. At WZ’s request, Croydon County Court authorised WZ on 26 October 2011 to bring an action before the French courts in order, first, to have the bankruptcy order registered and, second, to obtain a ruling that the sale of the properties referred to in paragraph 12 above and the mortgages granted over those properties to VA (‘the sales and mortgages at issue’) were transactions at an undervalue or for no consideration under the relevant United Kingdom bankruptcy law provisions. WZ thus sought a decision authorising the restitution of those properties to UB’s bankruptcy estate, for the purposes of their disposal. The French courts granted the declaration.
The legal issue under consideration is the reach of the Insolvency Regulation’s establishment of jurisdiction for the courts of the Member State of COMI. Does it extend to an action by a trustee in bankruptcy appointed by a court of the Member State in which the insolvency proceedings were opened (here: the UK) the purpose of which is to obtain a declaration that mortgages registered over immovable property situated in another Member State (here: France) and the sale of that property are ineffective as against the bankruptcy estate.
The CJEU correctly emphasises that the Insolvency Regulation old or new does not impose any rule conferring on the courts of the place where immovable property is located international jurisdiction to hear an action for the restitution of those assets to the bankruptcy estate in insolvency proceedings. Furthermore, concentrating all the actions directly related to the insolvency proceedings before the courts of the Member State within the territory of which with those proceedings were opened is consistent with the objective of improving the efficiency and speed of insolvency proceedings having cross-border effects. Support for this ex multi: Wiemer & Trachte.
The English courts therefore should have exercised jurisdiction per vis attractiva concursus – the file before the CJEU does not reveal its hesitation to do so. It does reveal that UB claims among others that the insolvency proceedings in England had already been concluded and presumably therefore the pauliana time-barred.
(Handbook of) EU private international law, 2nd ed. 2016, Chapter 5 Heading 5.4.1. Chapter 2 Heading 22.214.171.124.1
Reitbauer: contract, pauliana and exclusive jurisdictional rules. CJEU simply applies Feniks, its forum contractus view remains unconvincing.
Update 18 July 2019 for an alternative view, see Michael McParland QC here. Michael’s point of view is that of the construction sector, and avoiding ‘debt dodging’. Ours (mine, below, and Michiel Poesen’s here) is the excessive stretch of the notion of contract.
Tanchev AG’s focus on fraus arguable reconciles both – but the Court did not follow.
I reviewed Tanchev AG’s Opinion in C‑722/17 Reitbauer here. Readers best refer to it to get insight into the complex factual matrix. The CJEU held on Wednesday last week- no English version of the judgment is as yet available.
In essence applicants are attempting to anchor their pauliana unto A24(5)’s enforcement jurisdiction. Failing that, the anchor might be A24(1)’s locus rei sitae exclusive jurisdictional rule.
The Court like the AG rejects jurisdiction on the basis of Article 24(5). They are right: A25(5) must not resurrect merits claims on much wider issues (claim for compensation of applicants’ debt, objections concerning the non-existence of a claim underlying a judicially ordered auction, and concerning the invalidity of the creation of the pledge for that claim under a loan agreement).
Court and AG are also right in rejecting Article 24(1) jurisdiction. The issues at stake are far removed from the reasons which justify exclusive jurisdiction. (The Court refers to Komu, Schmidt, Weber).
Then, surprisingly (for it was not part of the questions asked; the AG entertained it but that is what AGs do) the Court completes the analysis proprio motu with consideration of Article 7(1)’s forum contractus rule, with respect to claimants’ argument that the acknowledgement of debt by Isabel, cannot be used against them. Tanchev AG as I noted essentially suggested a limitation of Feniks to cases of fraus – arguably present here. At 59-60 the Court simply notes that all creditors were ‘contractually’ linked to Isabel C, and then applies Feniks to come to a finding of contractual relation between claimants and Mr Casamassima: without any reference to the fraus element (I had indeed suspected the Court would not so quickly vary its own case-law).
The AG did not discuss the place of performance of the contract (between Reitbauer et al and Mr Casamassima – this was exactly one of the sticky points signalled by Bobek AG in Feniks). The CJEU however does, and at 61 simply identifies that as the place where the underlying contract, between Isabel C and the building contractors, had to be performed: that is, the place of the renovation works in Austria.
That an Article 7(1) forum was answered at all, is surprising. That the place of performance of that contract is straightforwardly assimilated with the underlying contractual arrangement, is not necessarily convincing. That Feniks would not so soon be varied (if at all), was to be expected.
Forum contractus is surely stretching to forum abundantum.
(Handbook of) EU Private International Law, 2nd ed. 2016, Chapter 2, Heading 126.96.36.199
Tanchev AG in Reitbauer: contract, pauliana and exclusive jurisdictional rules. Suggests restriction of CJEU Feniks to cases of fraus.
A little bit of factual background (and imagination; I shall let readers’ imagination run their course) is needed to appreciate Tanchev AG’s Opinion last week in C‑722/17 Reitbauer, which engages Articles 24(1) and (5), and Article 7(1).
It is alleged in the ‘opposition proceedings’ at issue that the claim of creditor A (the defendant in the CJEU proceeding, Mr Casamassima), which arises from a loan agreement secured by a pledge, and which competes with a counterclaim of creditors B (the applicants at the CJEU: Reitbauer and Others) is invalid due to the (wrongful) preferential treatment of creditor A. This objection is similar to what is known under Austrian law as an action for avoidance (Anfechtungsklage).
The defendant, Mr Casamassima and Isabel C. (‘the debtor’) are resident in Rome and lived together, at least until the spring of 2014. In 2010, they purchased a house in Villach, Austria; and the debtor, Isabel C, was registered in the land register as being the sole owner.
Contracts for extensive renovation work of the house were entered into between Isabel and the CJEU applicants, contracts which were entered into with the ‘participation’ of Mr Casamassima. Because the costs of the renovation work far exceeded the original budget, payments to Reitbauer et al were suspended. From 2013 onwards, Reitbauer et al were therefore involved in judicial proceedings in Austria against Isabel. Early 2014, the first judgment was handed down in favour of the applicants, and others followed. Isabel appealed against those judgments.
On 7 May 2014 before a court in Rome, Isabel acknowledged Mr Casamassima’s claim against her with respect to a loan agreement, amounting to EUR 349 772.95. She undertook to pay this amount to the latter within five years under a court settlement. In addition, Isabel undertook to have a mortgage registered on the house in Villach (Austria) in order to secure Mr Casamassima’s claim [the amount of the claim is the result of compensation between the original claim and a counterclaim. Isabel requested Mr C to pay her for overtime work. Mr C requested approximately EUR 380 000 for the purchase of the house and the works. According to him the house belonged formally only to the debtor, who was registered as the sole owner, but the funds were provided by the defendant. Finally, the two parties reached an agreement, leading to the sum at issue].
Now we come to the issues sub judice: at 17 ff (footnotes omitted):
On 13 June 2014 a (further) certificate of indebtedness and pledge certificate was drawn up under Austrian law in Vienna by an Austrian notary to guarantee the above arrangement (pledge 1). With this certificate, the pledge on the house in Villach was created on 18 June 2014.
The judgments in favour of the applicants did not become enforceable until after this date. The pledges on the house of the debtor held by the applicants, obtained by way of legal enforcement proceedings (pledge 2), therefore rank behind the contractual pledge 1 in favour of the defendant.
On 3 September 2015, the court in Rome confirmed that the court settlement of 7 May 2014 constituted a European Enforcement Order.
In order to realise the pledge, the defendant applied in February 2016 to the referring court (Bezirksgericht Villach (District Court, Villach, Austria)) for an order against the debtor, requiring a compulsory auction of the house in Villach. The house was auctioned off in the autumn of 2016 for EUR 280 000. The order of entries in the land register shows that the proceeds would go more or less entirely to the defendant because of pledge 1 (registered under Austrian law in June 2014).
With a view to preventing this, the applicants brought an action for avoidance (Anfechtungsklage) in June 2016 before the Landesgericht Klagenfurt (Regional Court, Klagenfurt, Austria) against the defendant and the debtor. The action was dismissed by that court ‘due to a lack of international jurisdiction in view of the [debtor’s and the defendant’s] domicile’ outside of Austria. In July 2017, that decision became final.
At the same time the applicants filed an opposition before the referring court (Bezirksgericht Villach (District Court, Villach)) at the hearing of 10 May 2017 regarding the distribution of the proceeds from the compulsory auction, and subsequently brought opposition proceedings, as provided for in the EO, against the defendant.
In these opposition proceedings, the applicants seek a declaration that the decision regarding the distribution to the defendant of EUR 279 980.43 was not legally valid in so far as: (i) the debtor had damages claims against the defendant of at least the same amount as the claim arising from the loan agreement, with the result that a claim no longer existed (they claim that the debtor confirmed that the defendant had placed orders with the applicants without her knowledge and consent); and (ii) the certificate of indebtedness and pledge certificate of June 2014 were drawn up merely as a formality and for the purpose of pre-empting and preventing the applicants from bringing any enforcement proceedings in relation to the house.
There we are. In essence applicants are attempting to anchor their pauliana unto A24(5)’s enforcement jurisdiction, in which case Mr C’s enforcement action has acted as a Trojan horse. (Note a similar potential in Kerr v Postnov(a)). Failing that, the anchor might be A24(1)’s locus rei sitae exclusive jurisdictional rule.
Mr C contends in substance that A24(5) B1a does not apply. He argues that the action lacks a direct connection to official enforcement measures: what is being sought is a substantive examination of the pledge entered into in his favour. By its nature, the action lodged is equivalent to an action for avoidance; and in Reichert the CJEU has already ruled that this jurisdiction is not applicable to actions for avoidance. This must therefore also apply if the action for avoidance is exercised by way of an opposition against the distribution and ensuing opposition proceedings. Moreover, he argues A24(1) B1a is not applicable, as in the opposition proceedings the connection with the location of the house at issue is lacking (the opposition proceedings took place only after the immovable property had been auctioned off by the court).
The AG first of all at 39 ff rejects jurisdiction on the basis of Article 24(5). I believe he is right: see my Trojan horse suggestion above. A25(5) must not resurrect merits claims on much wider issues (claim for compensation of applicants’ debt, objections concerning the non-existence of a claim underlying a judicially ordered auction, and concerning the invalidity of the creation of the pledge for that claim under a loan agreement ) for which the enforcement court does not have original jurisdiction. Neither does A24(1) ground jurisdiction: parallel with Reichert is obvious.
Then however the AG, sensing perhaps the suggestions of fraudulent construction, suggests Article 7(1)’s’ forum contractus as a way out – not something which the referring court had enquired about hence quite possible the CJEU might not entertain it. Clearly per Handte there is a contract between applicants and Isabel. However is Mr C involved, too?: the AG draws on Feniks: at 72 ff: in Feniks the CJEU does not require knowledge by the defendant of the first contract, nor does it require an intention to defraud. However in casu it looks like there might be both (subject to factual review by the referring court). At 84: ‘Given the fact that in the judgment in Feniks the jurisdiction in contractual matters in disputes brought against a third party was extended to an actio pauliana even though there was no contractual relationship between the applicant and the defendant, knowledge of a third party should act as a limiting factor: as in the present case, the third party needs to know that the legal act binds the defendant to the debtor and that that causes harm to the contractual rights of another creditor of the debtor (the applicants).’
And at 92: ‘the defendant’s knowledge of the existence of the contract(s) at issue is important.’
The AG is essentially suggesting a limitation of Feniks to cases of fraus – it is unlikely that the CJEU will follow (and vary Feniks so soon). However it is clear that knowledge of the contract between the other parties, particularly where supported by elements of fraus, will increase the potential for application of the (in my view problematic) Feniks route. Note the AG does not discuss the place of performance of the contract (between Reitbauer et al and Mr C – this was exactly one of the sticky points signalled by Bobek AG in Feniks).
(Handbook of) EU Private International Law, 2nd ed. 2016, Chapter 2, Heading 188.8.131.52
Court confirms: tortious suit brought by liquidator (‘Peeters /Gatzen’) is covered by Brussels I Recast.
I am hoping to catch-up with my blog backlog this week, watch this space. I’ll kick off with the Court of Justice last week confirming in C–535/17 NK v BNP Paribias Fortis that the Peeters /Gatzen suit is covered by Brussels I Recast. Citing similar reasons as Bobek AG (whose Opinion I reviewed here), the Court at 34 concludes that the ‘action is based on the ordinary rules of civil and commercial law and not on the derogating rules specific to insolvency proceedings.’
This reply cancelled out the need for consideration of many of the issues which the AG did discuss – those will have to wait for later cases.
(Handbook of) EU private international law, 2nd ed. 2016, Chapter 5, Heading 5.4.1, Heading 5.7.
Vis (non) attractiva concursus. Bobek AG suggests tortious suit brought by liquidator (‘Peeters /Gatzen’) is covered by Brussels I Recast.
I earlier posted a guest blog on the qualification of the Dutch Peeters /Gatzen suit, a damages claim based on tort, brought by a liquidator against a third party having acted wrongfully towards the creditors. Bobek AG opined two weeks back in C-535/17 NK (insolvency practitioner for a baillif practice) v BNP Paribas Fortis.
His Opinion is of relevance not just for the consideration of jurisdiction, but perhaps even more so (for less litigated so far) for the analysis of applicable law.
Roel Verheyden has commented on the Opinion in Dutch here, and Sandrine Piet had earlier contextualised the issues (also in Dutch) here. She clarifies that the suit was introduced by the Dutch Supreme Court in 1983, allowing the insolvency practitioner (as EU insolvency law now calls them) to claim in tort against third parties whose actions have diminished the collective rights of the creditors, even if the insolvency person or company at issue was not entitled to such suit. The Advocate General himself, in his trademark lucid style, summarises the suit excellently.
Importantly, the Peeters /Gatzen is not a classic pauliana (avoidance) suit: Bobek AG at 16: ‘The power of the liquidator to bring a Peeters-Gatzen action is not limited to cases where the third party belongs to the circle of persons who, based on a Paulian (bankruptcy) claim .. would be liable for involvement in allegedly detrimental acts. The liquidator’s competence relates more generally to the damage caused to the general body of creditors by the wrongful act of a third party involved in causing that damage. The third party need not have caused the damage or have profited from it: it is sufficient that that third party could have prevented the damage but cooperated instead.’
In the case at issue, the third party is BNP Paribas Fortis, who had allowed the sole director of the company to withdraw large amounts of cash from the company’s account.
Firstly, on the jurisdictional issue, Nickel /Goeldner and Nortel had intervened after the interim judgments of the Dutch courts, creating doubt in their minds as to the correct delineation between the Insolvency and Brussels I Recast Regulation. The Advocate-General’s approach in my view is the correct one, and I refer to his Opinion for the solid arguments he deploys. In essence, the DNA of the suit are the ordinary rules of civil law (re: tort). That it be introduced by the insolvency practitioner (here, the liquidator) and that it is the case-law on liquidation proceedings which has granted that right to the liquidator, is not materially relevant. Note that the AG correctly adds in footnote 40 that even if the suit is not subject to the Insolvency Regulation, that Regulation does not disappear from the litigation. In particular, given that liquidation proceedings are underway, the lex concursus determines the ius agendi of the liquidator to bring the suit in tort, in another Member State (Belgium, on the basis of Article 7(2) or 4 Brussels I Recast).
Now, for applicable law, the AG first of all completes the analysis on the basis of the Insolvency Regulation, in the unlikely event the CJEU were not to follow him on the jurisdictional issue. Here (para 85 ff) the referring court wishes to know whether, if the Peeters-Gatzen action is covered by the Insolvency Regulation, such a claim would be governed, pursuant to Article 4(1) of that Regulation, by the law of the Member State where the insolvency proceedings were opened as regards both the power of the liquidator to bring that claim and the substantive law applicable to that claim. This question seeks to determine whether it is possible to follow the approach of the second-instance court in the main proceedings, and separate the law governing the powers of the liquidator (ius agendi) from the law applicable to the merits of the claim. The powers of the liquidator would then be governed by the lex fori concursus (Dutch law, per Article 4(2)(c) Insolvency Regulation). That article states that ‘the law of the State of the opening of proceedings … shall determine in particular … the respective powers of the debtor and the liquidator’. However, the merits of the claim would then be governed by the law applicable by virtue of the general (non-insolvency) conflict of law rules. In the present case that would lead to application of residual Dutch conflict of law rules, because the Rome II Regulation does not apply ratione temporis as the AG further explains. These rules lead to Belgian law being the lex causae.
Within the assumption of the Insolvency Regulation determining jurisdiction (for see footnote 40 as reported above, re ius agendi) the AG emphasises the Regulation’s goal of Gleichlauf: at 89: If the Peeters-Gatzen action were covered by the Insolvency Regulation, all its elements would be governed exclusively by the conflict of law rules of that regulation.
(Current) Article 16’s exception such as in Nike and Lutz does not come into play for as Bobek AG notes at 94, ‘It is difficult to see how the Peeters-Gatzen action at issue in the main proceedings could be qualified as a rule ‘relating to the voidness, voidability or unenforceability of legal acts detrimental to all the creditors’, in the sense of Article 4(2)(m) [old, GAVC] of the Insolvency Regulation. The purpose of such an action is not a declaration of the voidness, voidability or unenforceability of an act of the third party, but the recovery of damages based on the wrongful behaviour of that third party towards the creditors. Therefore, as Article 4(2)(m) [old, GAVC] of the regulation would not apply in the main proceedings, the exception in Article 13 [old, GAVC] could not apply either.’
The AG finally discusses the referring court’s question whether if the Peeters-Gatzen action is exclusively subject to the lex fori concursus, it would be possible to take into account, whether directly or at least by analogy, and on the basis of Article 17 Rome II read in conjunction with Article 13 (now 16) of the Insolvency Regulation, the security regulations and codes of conduct applicable at the place of the alleged wrongful act (that is to say, in Belgium), such as financial rules of conduct for banks. Article 17 Rome II reads ‘In assessing the conduct of the person claimed to be liable, account shall be taken, as a matter of fact and in so far as is appropriate, of the rules of safety and conduct which were in force at the place and time of the event giving rise to the liability.‘
I have argued before that Article 17 Rome II does not have the rather extensive impact which some attribute to it. The AG, after signalling that the Article is yet to be applied by the CJEU, notes that Rome II does not apply here ratione temporis. He then concludes with an aside (it is not articulated as a proper argument – which is just as well for it is circular I suppose): at 104: ‘the more pertinent question is… whether it is really necessary to have recourse to a cumbersome legal construction, in this case the application of rules by analogy, outside of their material and temporal scope, in order to reach a solution (the application of Belgian law) which solves a problem (the applicability of Netherlands law by virtue of the Insolvency Regulation) that should not have been created in the first place (since the Peeters-Gatzen claim at hand should fall within the scope of the Brussels I Regulation). In any event, I am of the view, also in this regard, that these questions by the referring court rather confirm that there is no close connection between that action and the insolvency proceedings.’
(Handbook of) EU private international law, 2nd ed. 2016, Chapter 5, Heading 5.4.1, Heading 5.7.
I called Bobek AG’s Opinion in C-337/17 ‘solid’ – by which I also implied: convincing. Is the actio pauliana by a Polish company against a Spanish company, which had bought immovable property from the former’s contracting party, one relating to ‘contract’ within the meaning of Article 7(1) Brussels I Recast?
Bobek AG Opined it is not. The CJEU today held it is. I disagree.
Firstly, the second chamber, at 29 ff, repeats the inaccurate references in Valach and Tunkers, that (at 30) ‘actions which fall outside the scope of [the Insolvency Regulation] fall within the scope of [Brussels I Recast].’ This oft repeated quote suggest dovetailing between the two Regulations, a view which is patently incorrect: readers can use the tag ‘dovetail’ or ‘arrangement’ (for ‘scheme of arrangement’) for my view on same; see e.g. Agrokor.
Having held (this was not seriously in doubt) that Brussels I Recast is engaged, the Court then takes a much wider view of the Handte formula than advocated by Bobek AG. The Court at 37 refers to Granarolo, merely in fact to emphasise the requirement of strict interpretation of the jurisdictional rules which vary Article 4’s actor sequitur forum rei’s rule. At 43 follows the core of its reasoning: ‘By [the pauliana] the creditor seeks a declaration that the transfer of assets by the debtor to a third party has caused detriment to the creditor’s rights deriving from the binding nature of the contract and which correspond with the obligations freely consented to by the debtor. The cause of this action therefore lies essentially in the breach of these obligations towards the creditor to which the debtor agreed.’
The Court does not refer to Ergo, let alone to Sharpston AG’s ‘centre of gravity’ test in same, however it would seem that this may have influenced it. Yet in my view this is way too extensive a stretch of the Handte or Sharpston AG’s Ergo formula. Litigation in the pauliana pitches the creditor against the third party. It would take really quite specific circumstances for Handte to be met in the relation between these two. That a contractual relation features somewhere in the factual matrix is almost always true.
For a comparative benchmark, reference can be made to Refcomp where the Court took a very limiting view on subrogration of choice of court.
The Court’s formulation at 45 is entirely circular: were the creditor not able to sue in the forum contractus, ‘the creditor would be forced to bring proceedings before the court of the place where the defendant is domiciled, that forum, as prescribed by Article 4(1) of Regulation No 1215/2012, possibly having no link to the place of performance of the obligations of the debtor with regard to his creditor.’ Indeed: because the pauliana does not mordicus have to links to that place; it is not because it might not, that a forum contractus has to be conjured up to secure these links.
The Court then quite forcefully and seemingly without much hesitation identifies a specific forum contractus (unlike the AG who had suggested that that very difficulty supports his view that there simply is no forum contractus to speak of): at 46: ‘the action brought by the creditor aims to preserve its interests in the performance of the obligations derived from the contract concerning construction works, it follows that ‘the place of performance of the obligation in question’ is, according to Article 7(1)(b) of this regulation, the place where, under the contract, the construction services were provided, namely Poland.’ This is an even further stretch: Feniks invested in Coliseum with a view to the latter conducting construction works, which it largely outsourced to subcontractors. The contract between Feniks and Coliseum was one of investment; not one of construction. Yet the even further downstream construction works now serve as forum contractus for the Pauliana. I just do not understand that.
The initial contractual obligation between creditor and debtor therefore creates crucial jurisdictional consequences vis-a-vis third parties whose appearance in the factual matrix presents itself only very downstream. That, I would suggest, does not at all serve the predictability which the Chamber (rightly) emphasises at the very outset of its judgment as being the driving principle behind its interpretation.
I am not convinced by this judgment. (And yes, I am being polite).
(Handbook of) EU Private International Law, 2nd ed. 2016, Chapter 2, Heading 184.108.40.206